India can save the US - The 5 Minute WrapUp by Equitymaster
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India can save the US

Feb 12, 2009

In this issue:
» John Bogle's views on 'real' wealth
» Uniform face value system for all listed companies
» What is Buffett investing in?
» Gold prices shoot up
» ...and more!

Indians can help the US tide over the depression like crisis that the world's largest nation faces. At least this is what the noted writer and New York Times columnist, Thomas Friedman, believes. He writes in his latest post on the newspaper's website - "Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration."

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He further quotes Shekhar Gupta, editor of The Indian Express - "All you need to do is grant visas to two million Indians, Chinese and Koreans. We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate - no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans."

Image source: New York Times

A wonderful mantra for survival indeed! But whether it will find favour within the US is highly doubtful given Obama's rhetoric regarding saving American jobs by putting restrictions on offshoring. Friedman has indeed long believed that the developed world cannot maintain or improve productivity by closing their gates to immigration and offshoring. In viewing the American immigration laws as too restrictive and damaging to economic output, he said a few years ago - "It is pure idiocy that Congress will not open our borders - as wide as possible - to attract and keep the world's first-round intellectual draft choices in an age when everyone increasingly has the same innovation tools and the key differentiator is human talent."

Friedman argues against opponents of free trade that by exporting low-skill and low-wage jobs to foreign countries, more advanced and higher-skilled jobs will be freed up and made available for those displaced by the outsourcing. And so, he writes in his latest article - "Dear America, please remember how you got to be the wealthiest country in history. It wasn't through protectionism, or state-owned banks or fearing free trade. No, the formula was very simple: build this really flexible, really open economy, tolerate creative destruction so dead capital is quickly redeployed to better ideas and companies, pour into it the most diverse, smart and energetic immigrants from every corner of the world and then stir and repeat, stir and repeat, stir and repeat, stir and repeat."

We Indians love you, Thomas!

John Bogle, the founder of Vanguard Group, also had very interesting views to state in his recent interview to CNN. The legendry fund manager who was ironically born at the start of the Great Depression, in 1929, believes that the current economic crisis is the biggest that he has seen in his lifetime. Concurring that 'investing is an act of faith', the legendary investor acknowledged that greedy individuals and banks have taken advantage of the investors' faith in the financial system.

Nevertheless, he believes that the financial world has now discovered the real wealth out of the superficial wealth. With the market capitalisation of US companies coming down from US$ 18 trillion to nearly US$ 9 trillion, the dividend yield on the same has improved from 1% to 3% and they are currently valued at 1.5 times assets as against 3 times assets a couple of years back.

In a bid to reduce confusion among investors, SEBI is contemplating introducing a uniform face value system for all listed companies. At present, companies have the choice to decide what face value they want to adopt provided it is between Rs 1 and Rs 100. The confusion it appears is more apparent when dividend is declared as a percentage of face value.

However, the idea of introducing a uniform face value system is not something new and was something that was being considered for over eight years now. Obviously nothing much came out of it. In fact, SEBI earlier had announced that companies would now have to declare dividend on per share basis and not on the face value. However, this proved easier said than done due to legal complications. We really wonder whether this latest move of SEBI will be of any help. Are investors really such a confused lot? We think not.

As much as Warren Buffett would like to stick to his words of having an investment horizon of 'forever', the man heralded as the 'Oracle of Omaha' must disclose his holdings in Berkshire Hathaway and the performance of the same on a quarterly basis to the US Securities & Exchange Commission (SEC). Buffett is known to have evaluated companies based on their stability, competitive advantage and an enduring moat that protects excellent returns on invested capital. The man, who makes most of the investment decisions at Omaha-based Berkshire, is required to tell the regulators about changes to the firm's equity portfolio every three months.

Berkshire's stock price has declined 36% in the past year and its profits have fallen in four consecutive quarters. But Buffett stands undeterred. In fact, he is also reportedly investing his own money into US stocks as prices decline amid the worst financial crisis in 75 years. Having said that, his latest deals seem to have yielded even more favourable terms as Buffett agreed to buy preferred shares in companies that would pay him dividends ranging from 12% to 15%. Are you still surprised at his reticence?

As the world around us is mired in fear after years of greed, it is important to pay tribute to the man that knew the most about the origin of mankind and its evolution. The world today celebrates the 200th birthday of Charles Darwin, who taught us the history of evolution. Darwin, through his 'Origin of Species' showed that all species of life have evolved over time.
The evolution of Darwin
Image source: Wikipedia

But have we really, when it comes to matters of money? The greed for money now is the same as hundreds of years back. The root of the current recession is more of less the same as the Great Depression...greed for money, and more of it! So can we say that the species called 'man' has evolved over time in the matters of money? Probably not!

Charlie Munger, Warren Buffett's partner and a widely admired investor has in an article in the Washington Post put forth his views on how public confidence can be restored. He suggests that the government should put in place reforms that could be a mix of moral, accounting and economic concepts, to dampen future booms. Although these reforms will cause pain now, it should be endured for benefits in the future.

Key Asian indices closed lower today led by weakness in Japanese and Hong Kong markets. The Indian benchmark BSE-Sensex ended the day with a loss of nearly 153 points (1.6%). Although the inflation number (measured in terms of wholesale price index, WPI) declined to 4.4% during the week ended January 31, 2009 from 5.1% a week ago, the fall in IIP (index of industrial production) data dampened sentiments in domestic markets.

IIP for December 2008 fell by 2% as against a growth of 8.6% during December 2007, primarily due to the manufacturing sector registering a negative growth of 2.5% in December 2008 as against a rise of 8.6% last year. The European markets have also opened in the negative.

The price of Indian gold which toed in line with the international gold prices has shot to a high of Rs 14,390 per 10 grams. International prices, which are currently hovering around US$ 940 an ounce, have moved up sharply over the past few days given the heightened economic uncertainty.

 Today's investing mantra
"It is well to consider the financial strength and debt structure to see if a few bad years would hinder the company's long-term progress" - Peter Lynch

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